Do Income Tax Related Deficiencies in Publicly Disclosed PCAOB Part II Reports Influence Audit Client Financial Reporting of Income Tax Accounts?

Posted: 11 Apr 2014 Last revised: 15 May 2020

See all articles by Katharine D. Drake

Katharine D. Drake

University of Arizona - Department of Accounting

Nathan C. Goldman

North Carolina State University - Department of Accounting

Stephen J. Lusch

Texas Christian University - Department of Accounting

Date Written: October 30, 2015

Abstract

Deloitte’s 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm’s quality controls with respect to auditing income tax accounts. We investigate whether Deloitte’s actions to remediate the PCAOB’s concerns are associated with changes to their clients’ financial reporting for income taxes. We find that Deloitte’s clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte’s clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.

Keywords: PCAOB Inspections, Auditor scrutiny, Valuation allowances, Uncertain tax benefits, Earnings management

Suggested Citation

Drake, Katharine D. and Goldman, Nathan C. and Lusch, Stephen J., Do Income Tax Related Deficiencies in Publicly Disclosed PCAOB Part II Reports Influence Audit Client Financial Reporting of Income Tax Accounts? (October 30, 2015). The Accounting Review, Vol. 91, No. 5, September 2016. Available at SSRN: https://ssrn.com/abstract=2423458 or http://dx.doi.org/10.2139/ssrn.2423458

Katharine D. Drake (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Nathan C. Goldman

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Stephen J. Lusch

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

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